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Reliance Industries (RIL)
Energy
It’s a BUY. We upgrade the RIL stock to BUY from ADD (upgraded on July 25, 2011
from REDUCE) on valuations and 38% potential upside to our SOTP-based target price
of `1,045. Our reverse valuation exercise reflects that the market is not ascribing any
value to its E&P business. Our trough-case valuation is `890. However, a significant rerating
will depend on (1) improved corporate governance and (2) prudent use of cash;
we would suggest dividends/buy-backs in the absence of meaningful planned capex.
Upgrade to BUY given attractive valuations; concerns overdone
We upgrade the RIL stock to BUY from ADD previously given a favorable risk-reward balance post
the recent sharp correction in its stock price. We note that the stock has corrected 20% over the
past three months (see Exhibit 1) reflecting investor concerns about (1) likely tough operating
conditions for RIL’s refining and chemical businesses, (2) limited visibility on E&P business, (3)
potential negative implications from a CAG audit report and (4) lack of clarity over possible
utilization of cash. However, current valuations are discounting a rather pessimistic scenario. The
stock is currently trading at 11.2X FY2012E EPS and 10.1X FY2013E EPS.
Stock price is implying nil value to RIL’s E&P segment and lower multiples for key businesses
Exhibit 2 gives our SOTP-based fair valuation of RIL. We value the RIL stock without its E&P
segment at `856 with (1) the refining and petchem segments contributing `612/share and (2) cash
and investments (including loans and advances) at `244/share. This implies that the market is not
ascribing any value to RIL’s E&P business, which seems to be an overly pessimistic assumption. We
admit that the market may be ascribing lower multiples to RIL’s refining and chemical segments
given a bleak global economic outlook. However, we believe that cyclicality of a business should
not change its value over time and the multiples should be adjusted appropriately to reflect the
earnings cycle.
Reverse valuation implies 4.5X EV/EBITDA multiple to RIL’s refining and petchem segments
Our reverse valuation exercise (see Exhibit 3) shows that the stock price is implying 4.5X EV/EBITDA
to RIL’s refining and petchem businesses based on FY2012E estimates. We use DCF-based
valuation for RIL’s E&P segment which implies fair value of ~US$17 bn for its key E&P blocks
including KG D-6, KG D-3, KG D-9, NEC-25 and MN D-4. This is significantly lower than BP’s
implied valuation of US$24 bn assuming no performance payout from BP and negligible value
from RIL’s other blocks.
18% potential upside to our trough-case valuation of RIL at `890
We compute trough-case value of RIL at `890 (see Exhibit 4), assuming (1) lower multiples for
refining and petchem segments at 5.5X FY2013E EV/EBITDA, (2) peak production of KG D-6 block
at 50 mcm/d, (3) no tax exemption on gas production from KG D-6 block and (4) nil value from
the upstream blocks under development/appraisal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries (RIL)
Energy
It’s a BUY. We upgrade the RIL stock to BUY from ADD (upgraded on July 25, 2011
from REDUCE) on valuations and 38% potential upside to our SOTP-based target price
of `1,045. Our reverse valuation exercise reflects that the market is not ascribing any
value to its E&P business. Our trough-case valuation is `890. However, a significant rerating
will depend on (1) improved corporate governance and (2) prudent use of cash;
we would suggest dividends/buy-backs in the absence of meaningful planned capex.
Upgrade to BUY given attractive valuations; concerns overdone
We upgrade the RIL stock to BUY from ADD previously given a favorable risk-reward balance post
the recent sharp correction in its stock price. We note that the stock has corrected 20% over the
past three months (see Exhibit 1) reflecting investor concerns about (1) likely tough operating
conditions for RIL’s refining and chemical businesses, (2) limited visibility on E&P business, (3)
potential negative implications from a CAG audit report and (4) lack of clarity over possible
utilization of cash. However, current valuations are discounting a rather pessimistic scenario. The
stock is currently trading at 11.2X FY2012E EPS and 10.1X FY2013E EPS.
Stock price is implying nil value to RIL’s E&P segment and lower multiples for key businesses
Exhibit 2 gives our SOTP-based fair valuation of RIL. We value the RIL stock without its E&P
segment at `856 with (1) the refining and petchem segments contributing `612/share and (2) cash
and investments (including loans and advances) at `244/share. This implies that the market is not
ascribing any value to RIL’s E&P business, which seems to be an overly pessimistic assumption. We
admit that the market may be ascribing lower multiples to RIL’s refining and chemical segments
given a bleak global economic outlook. However, we believe that cyclicality of a business should
not change its value over time and the multiples should be adjusted appropriately to reflect the
earnings cycle.
Reverse valuation implies 4.5X EV/EBITDA multiple to RIL’s refining and petchem segments
Our reverse valuation exercise (see Exhibit 3) shows that the stock price is implying 4.5X EV/EBITDA
to RIL’s refining and petchem businesses based on FY2012E estimates. We use DCF-based
valuation for RIL’s E&P segment which implies fair value of ~US$17 bn for its key E&P blocks
including KG D-6, KG D-3, KG D-9, NEC-25 and MN D-4. This is significantly lower than BP’s
implied valuation of US$24 bn assuming no performance payout from BP and negligible value
from RIL’s other blocks.
18% potential upside to our trough-case valuation of RIL at `890
We compute trough-case value of RIL at `890 (see Exhibit 4), assuming (1) lower multiples for
refining and petchem segments at 5.5X FY2013E EV/EBITDA, (2) peak production of KG D-6 block
at 50 mcm/d, (3) no tax exemption on gas production from KG D-6 block and (4) nil value from
the upstream blocks under development/appraisal.
